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Apple and China

February 2, 2012

The NYTimes story last week on the iEconomy in China has raised again the issue of working conditions and notably practices in China. By Apple executives own admission this is a sensitive issue which could spoil the Apple Brand.

Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors….

Some former Apple executives say there is an unresolved tension within the company: executives want to improve conditions within factories, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products. Tuesday,Apple reported one of the most lucrative quarters of any corporation in history, with $13.06 billion in profits on $46.3 billion in sales. Its sales would have been even higher, executives said, if overseas factories had been able to produce more.

Executives at other corporations report similar internal pressures. This system may not be pretty, they argue, but a radical overhaul would slow innovation. Customers want amazing new electronics delivered every year.

But the issue around labor practices does have broader implications in the current economic crisis where there appears to be a jobs shortage as persistent and as pernicious as the energy crisis for not just the US but the World in general. Workers in developed countries in North America and Western Europe are now at the “back of the jobs bus” because globalization and logistics networks allow products to be produced anywhere in the world where the lowest costs can be obtained.

What Apple Could Do

Last quarter Apple reported $13B in profits. It currently has a almost $100 billion in cash and equivalents on its balance sheet with no debt whatsoever. By spending 0.5% of that $100 Billion on its Chinese workers at the Chengdu Foxconn plant Apple could create a virtuous cycle. Adding $0.5 billion to the wage pool at the Foxconn plant spread over 250,000 workers that deal with Apple products would add $2000 to each works wages [or roughly 8-10,000 RMB to each worker’s take home pay]. Suddenly working on the Apple line would become very desirable and well rewarded for the anytime overtime and exacting reliability work that is demanded by Cupertino.

But Apple’s payscale would put pressure on other international companies like Dell, Microsoft, Nokia, and Toshiba to match Apple. Wages not only at Foxconn but other electronics suppliers would see upward pressures. This in turn would mean that electronics and other products would cost more in the US and the rest of the World [or maybe Apple which does not seem to know what to do with that fast growing $100 billion kitty could absorb the 1-2% price increases and take a slightly smaller profit margin which is currently in the 33% range]. The net result is that wages and self sustaining home consumption could start to drive the Chinese economy in the long term. And in turn technical manufacturing could spread more equitably throughout the world.

However, reaction to this NYTimes report has been polarized. This can be seen well at Betanews – an excellent tech site that follows the latest technology developments. The article says Apple is responsible for inhuman working conditions and/or pay in China. But the reaction in the comments section is about as temperate and civil as a GOP Presidential debate. By this measure and NYTimes promise to pursue this story in upcoming iEconomy reports, it appears this topic will stay on radar screens for the foreseeable future. And well it should given the worldwide jobs shortage.